The Securities and Exchange Commission’s (SEC) Division of Enforcement (Enforcement) plays a key role in meeting the agency’s mission to protect investors and maintain fair and orderly markets. In recent years, Enforcement has brought cases yielding record civil penalties, but questions have been raised about its capacity to manage its resources and fulfill its law enforcement and investor protection responsibilities. GAO was asked to evaluate, among other issues, (1) SEC’s progress toward implementing GAO’s 2007 recommendations; (2) the extent to which Enforcement has an appropriate mix of resources dedicated to achieving its objectives; and (3) the adoption, implementation, and effects of recent penalty policies. GAO analyzed information on resources, enforcement actions, and penalties; and interviewed current and former SEC officials and staff, and others.

What GAO Recommends

GAO recommends the SEC Chairman (1) consider an alternative organizational structure for OCD; (2) further review the level and mix of resources dedicated to Enforcement, and assess the impact of the division’s internal case review process; (3) examine whether the 2006 corporate penalty policy is achieving its intended goals; and (4) take steps to ensure appropriate staff participation in policy development and review. SEC agreed with the recommendations.

Of particular interest, the report comments on two controversial policies of the Cox SEC: the factors to take into account in assessing corporate penalties and the requirement of prior Commission approval before staff initiated negotiations involving corporate penalties. As stated in the report:

Enforcement management, investigative attorneys, and others agreed that two recent corporate penalty polices—on factors for imposing penalties, and Commission pre-approval of a settlement range—have delayed cases and produced fewer, smaller penalties. GAO also identified other concerns, including the perception that SEC had “retreated” on penalties, and made it more difficult for investigative staff to obtain “formal orders of investigation,” which allow issuance of subpoenas for testimony and records. Our review also showed that in adopting and implementing the penalty policies, the Commission did not act in concert with agency strategic goals calling for broad communication with, and involvement of, the staff. In particular, Enforcement had limited input into the policies the division would be responsible for implementing. As a result, Enforcement attorneys reported frustration and uncertainty in application of the penalty policies.